Table of Contents
USAA Family of Funds 1
Message from the President 2
Investment Review 4
Message from the Managers 5
Shareholder Voting Results 8
Financial Information
Portfolio of Investments 9
Notes to Portfolio of Investments 14
Statement of Assets and Liabilities 15
Statement of Operations 16
Statements of Changes in Net Assets 17
Notes to Financial Statements 18
Important Information
Through our ongoing efforts to reduce expenses and respond to shareholder
requests, your annual and semiannual report mailings are streamlined. One copy
of each report is sent to each address, rather than to every registered owner.
For many shareholders and their families, this eliminates duplicate copies,
saving paper and postage costs to the Fund.
If you are the primary shareholder on at least one account, prefer not to
participate in streamlining, and would like to continue receiving one report per
registered account owner, you may request this in writing to:
USAA Investment Management Company
Attn: Report Mail
9800 Fredericksburg Road
San Antonio, TX 78284-8916
or phone a mutual fund representative at 1-800-531-8448 during business hours.
This report is for the information of the shareholders and others who have
received a copy of the currently effective prospectus of the USAA Income
Strategy Fund, managed by USAA Investment Management Company (IMCO). It may be
used as sales literature only when preceded or accompanied by a current
prospectus which gives further details about the Fund.
USAA with the eagle is registered in the U.S. Patent & Trademark Office.
(Copyright)2000, USAA. All rights reserved.
USAA Family of Funds Summary
Fund Minimum
Type/Name Volatility Investment
- -----------------------------------------------------------
CAPITAL APPRECIATION
- -----------------------------------------------------------
Aggressive Growth Very high $3,000
Emerging Markets Very high $3,000
First Start Growth Moderate to high $3,000
Gold Very high $3,000
Growth Moderate to high $3,000
Growth & Income Moderate $3,000
International Moderate to high $3,000
S&P 500(Registered
Trademark) Index Moderate $3,000
Science & Technology Very high $3,000
Small Cap Stock Very high $3,000
World Growth Moderate to high $3,000
- -----------------------------------------------------------
ASSET ALLOCATION
- -----------------------------------------------------------
Balanced Strategy Moderate $3,000
Cornerstone Strategy Moderate $3,000
Growth and Tax
Strategy Moderate $3,000
Growth Strategy Moderate to high $3,000
Income Strategy Low to moderate $3,000
- -----------------------------------------------------------
INCOME - TAXABLE
- -----------------------------------------------------------
GNMA Low to moderate $3,000
High-Yield
Opportunities High $3,000
Income Moderate $3,000
Income Stock Moderate $3,000
Intermediate-Term
Bond Low to moderate $3,000
Short-Term Bond Low $3,000
- -----------------------------------------------------------
INCOME - TAX EXEMPT
- -----------------------------------------------------------
Long-Term Moderate $3,000
Intermediate-Term Low to moderate $3,000
Short-Term Low $3,000
State Bond Income Moderate $3,000
- -----------------------------------------------------------
MONEY MARKET
- -----------------------------------------------------------
Money Market Very low $3,000
Tax Exempt
Money Market Very low $3,000
Treasury Money
Market Trust Very low $3,000
State Money Market Very low $3,000
- -----------------------------------------------------------
Foreign investing is subject to additional risks, which are discussed in the
funds' prospectuses.
S&P 500(Registered Trademark) is a trademark of The McGraw-Hill Companies, Inc.
and has been licensed for use. The Product is not sponsored, sold or promoted by
Standard & Poor's, and Standard & Poor's makes no representation regarding the
advisability of investing in the Product.
Some income may be subject to state or local taxes or the federal alternative
minimum tax.
An investment in a money market fund is not insured or guaranteed by the FDIC or
any other government agency. Although the fund seeks to preserve the value of
your investment at $1 per share, it is possible to lose money by investing in
the fund.
The Science & Technology Fund may be more volatile than a fund that diversifies
across many industries.
The InveStart(Registered Trademark) program is available for investors without
the $3,000 initial investment required to open an IMCO mutual fund account. A
mutual fund account can be opened with no initial investment if you elect to
have monthly automatic investments of at least $50 from a bank account.
InveStart is not available on tax-exempt funds or the S&P 500 Index Fund. The
minimum initial investment for IRAs is $250, except for the $2,000 minimum
required for the S&P 500 Index Fund. IRAs are not available for tax-exempt
funds. The Growth and Tax Strategy Fund is not available as an investment for
your IRA because the majority of its income is tax exempt.
California, Florida, New York, Texas, and Virginia funds available to residents
only.
Nondeposit investment products are not insured by the FDIC, are not deposits or
other obligations of, or guaranteed by, USAA Federal Savings Bank, are subject
to investment risks, and may lose value.
For more complete information about the mutual funds managed and distributed by
USAA Investment Management Company, including charges and operating expenses,
please call 1-800-531-8181 for a prospectus. Read it carefully before you
invest.
Message from the President
[Photograph of the President and Vice Chairman of the Board, Michael J. C. Roth,
CFA, appears here.]
As I write this message, I am also in the process of preparing to lead a panel
on personal finance at the Greater San Antonio Chamber of Commerce's annual
conference on economic development. As we enter 2000, I have asked my fellow
panelists to look back to what they consider to be the key lessons they have
learned in careers that all span at least 25 years in investments.
The incident and the person I have chosen is the visit of a well-known equity
strategist from one of the major investment bankers to San Antonio in the spring
of 1982. I should remind you what the spring of 1982 was like. The market had
not yet shaken off the effects of repeated, arbitrary increases in the price of
oil; the roaring inflation which followed; and the highest U.S. interest rates
since the Civil War. Stocks and bonds had not yet come off their worst
performance since World War II. Against this backdrop, that well-known equity
strategist delivered a magnificent after-dinner presentation. He plucked facts
and figures from a wide variety of sources and wove them into a compelling
argument. His conclusion was clear: "Stay out of this market!" He was brilliant.
He was dead wrong. That summer saw the beginning of the greatest bull market for
both stocks and bonds in U.S. history.
This incident has greatly influenced my thinking and my career. It taught me
these things:
- It is best to base investment strategy on something other than a forecast
of the market.
- If you insist on forecasting the market, it doesn't help to make the
little calls. You absolutely must be right at times like spring of 1982.
- If you use an asset allocation approach to investing, your chances of
being in at a major turning point are 100%.
That is why I believe in the asset allocation approach of our strategy funds.
Sincerely,
Michael J.C. Roth, CFA
President and
Vice Chairman of the Board
Past performance is no guarantee of future results.
For more complete information about the mutual funds managed and distributed by
USAA Investment Management Company, including charges and operating expenses,
please call for a prospectus. Read it carefully before investing.
Investment Review
USAA INCOME STRATEGY FUND
OBJECTIVE: High current return, with reduced risk over time, through an
asset-allocation strategy that emphasizes income and gives secondary emphasis to
long-term growth of capital.
TYPES OF INVESTMENTS: Invests principally in bonds, stocks, and money market
instruments.
- --------------------------------------------------------------------------------
11/30/99 5/31/99
- --------------------------------------------------------------------------------
Net Assets $69.6 Million $70.6 Million
Net Asset Value Per Share $11.97 $12.17
- --------------------------------------------------------------------------------
Average Annual Total Returns and 30-Day SEC Yield* as of 11/30/99
- --------------------------------------------------------------------------------
5/31/99 Since Inception 30-Day
to 11/30/99(+) 1 Year on 9/1/95 SEC Yield
2.10% 2.91% 9.43% 4.30%
- --------------------------------------------------------------------------------
* Calculated as prescribed by the Securities and Exchange Commission.
(+) Total returns for periods of less than one year are not annualized. This
six-month return is cumulative.
Total return equals income yield plus share price change and assumes
reinvestment of all dividends and capital gains distributions. No adjustment has
been made for taxes payable by shareholders on their reinvested income dividends
and capital gains distributions. The performance data quoted represent past
performance and are not an indication of future results. Investment return and
principal value of an investment will fluctuate, and an investor's shares, when
redeemed, may be worth more or less than their original cost.
CUMULATIVE PERFORMANCE COMPARISON
A chart in the form of a line graph appears here, illustrating the comparison of
a $10,000 hypothetical investment in the USAA Income Strategy Fund, the Lehman
Brothers Aggregate Bond Index, and the Lipper General Bond Funds Average for the
period of 09/01/95 through 11/30/99. The data points from the graph are as
follows:
USAA Income Lehman Lipper
Strategy Fund Index Average
------------- ------- -------
09/01/95 $10,000 $10,000 $10,000
11/30/95 10,711 10,382 10,398
05/31/96 10,323 10,262 10,464
11/30/96 11,546 11,012 11,304
05/31/97 11,725 11,115 11,556
11/30/97 12,851 11,844 12,233
05/31/98 13,686 12,328 12,758
11/30/98 14,253 12,963 13,087
05/31/99 14,366 12,865 13,059
11/30/99 14,668 12,958 13,137
Data since inception on 09/01/95 through 11/31/99
The graph illustrates the comparison of a $10,000 hypothetical investment in the
USAA Income Strategy Fund to the Lehman Index and the Lipper Average. The Lehman
Brothers Aggregate Bond Index is an unmanaged index made up of the
government/corporate index, the mortgage-backed securities index, and the
asset-backed securities index. The Lipper General Bond Funds Average is the
average performance level of all general bond funds, as reported by Lipper
Analytical Services, Inc., an independent organization that monitors the
performance of mutual funds.
Message from the Managers
[Photograph of Portfolio Managers, Pamela Bledsoe Noble, CFA (Money Market
Instruments); John W. Saunders, Jr., CFA (Allocation Manager and Bonds); and
Patrick O'Hare, CFA (Stocks); appears here.]
FUND OVERVIEW
The pattern is intact: The stock market has hit new highs in each shareholder
reporting period since the Fund began on September 1, 1995. On the bond side,
following the highly volatile period from August to November last year, the
market stabilized through January 1999. Since then interest rates have resumed
an upward move, depressing bond prices again.
The USAA Income Strategy Fund continues its good performance. Although past
performance is no guarantee of future results, the Fund's total return of 2.10%
for the six-month period was well above the Lipper average of 0.77% for funds in
the category.
BONDS
Economic strength continued through November 1999, renewing inflation fears and
the specter of higher interest rates. This fear continues even though the
Federal Reserve (the Fed) raised interest rates by 0.25% three times in the
six-month period: in June, August, and November. The yield on the 30-year
Treasury bond moved from 5.83% on May 28, 1999, to 6.29% for November 30, 1999.
With the yield on the long Treasury bond over 6%, this rise in interest rates
may be about over.
Investments in this portfolio segment on November 30, 1999, were 47% mortgage
pass-through securities, 18% U.S. Treasury bonds, and 11% corporate bonds.
STOCKS
With the backdrop of higher rates, most stocks had a difficult time. In fact,
only the technology and communications sectors outperformed the S&P 500 during
the period. Seven of the 11 sectors comprising the S&P 500 actually had negative
returns during the period.
The equity portion of the portfolio performed well as a result of being
overweighted in technology. In particular, the Fund was helped by owning Oracle,
Applied Materials, Texas Instruments, Cisco Systems, BMC Software, Intel,
America Online, Dell Computer, and Microsoft. Selected health care names
performed well, especially Bristol-Myers Squibb, Medtronic, and Schering-Plough.
The Fund benefited from owning Home Depot, Wal-Mart, and Dayton Hudson. The
Fund's position in Sprint Corporation performed well as the company agreed to be
purchased by MCI Worldcom. Other stocks performing well during the period were
Morgan Stanley Dean Witter & Co., Citigroup, and General Electric.
The Fund was hurt by its position in energy stocks -- in particular Unocal,
Schlumberger, and Texaco. Several capital goods stocks performed poorly
including Caterpillar, Tyco International, Emerson Electric, United
Technologies, and Boeing. Certain financial stocks performed poorly with the Fed
raising rates -- in particular, Freddie Mac and Bank of America. Other stocks
that hurt the Fund were Lear, Ford, CVS Corp., Time Warner, and Du Pont.
OUTLOOK FOR EQUITIES
Until it is clear that the Fed has stopped raising rates, we believe that the
markets will continue to trade in a narrow range. This will make owning the
right stocks increasingly important. We continue to favor technology stocks that
are benefiting from strong industry fundamentals. In particular, we believe that
companies exposed to the Internet infrastructure and to wireless communications
may continue to do well. We also continue to favor the health care area, despite
the uncertainty surrounding Medicare reform and the potential of a prescription
drug benefit for Medicare recipients.
MONEY MARKET INSTRUMENTS
Money market instruments are used to provide liquidity for withdrawals or to
provide a temporary investment until stock or bond purchases are made. U.S.
government discount notes are the most common instruments used for these
purposes.
Refer to the bottom of page 4 for the Lipper Average definition.
See page 9 for a complete listing of the portfolio of investments.
- ---------------------------
Top 5 Equity Holdings
(% of Net Assets)
- ---------------------------
Microsoft 1.2
General Electric 0.9
Oracle 0.9
Cisco Systems 0.8
Coca-Cola 0.7
- ---------------------------
ASSET ALLOCATION
11/30/99
A pie chart is shown here depicting the Asset Allocation as of November 30, 1999
of the USAA Income Strategy Fund to be:
U.S. Government & Agency Issues - 46.5%; Bonds - 28.9%; Stocks - 22.8%; and
Short-Term - 1.4%.
Percentages are of the net assets in the portfolio and may or may not equal
100%.
Shareholder Voting Results
On October 15, 1999, a special meeting of shareholders was held to vote on the
following proposals. All proposals were approved by the shareholders. All
shareholders of record on August 19, 1999, were entitled to vote on each
proposal. The number of votes shown below are for the entire series of the USAA
Investment Trust (the Trust) for proposals 1 and 2.
1 Proposal to elect Trustees as follows:
TRUSTEES VOTES FOR VOTES WITHHELD
Robert G. Davis 181,888,787 2,690,901
Michael J.C. Roth 181,881,641 2,698,047
David G. Peebles 181,888,787 2,690,901
Robert L. Mason 181,888,787 2,690,901
Michael F. Reimherr 181,883,427 2,696,261
Richard A. Zucker 181,875,813 2,696,966
Barbara B. Dreeben 181,883,427 2,696,261
John W. Saunders, Jr. and Howard L. Freeman, Jr. did not stand for reelection to
the Board. Their term of office will terminate on December 31, 1999.
2 Proposal to ratify the selection by the Board of Trustees of KPMG LLP as
auditors for the Trust for the fiscal year ending May 31, 2000.
NUMBER OF SHARES VOTING
- --------------------------------------------------------------------------------
FOR AGAINST ABSTAIN
179,181,697 2,930,888 2,467,103
USAA INCOME STRATEGY FUND
PORTFOLIO OF INVESTMENTS
November 30, 1999
(Unaudited)
Market
Number Value
of Shares Security (000)
- --------------------------------------------------------------------------------
COMMON STOCKS (22.8%)
Advertising/Marketing (0.3%)
2,600 Omnicom Group, Inc. $ 229
- --------------------------------------------------------------------------------
Aerospace/Defense (0.2%)
3,100 Boeing Co. 127
- --------------------------------------------------------------------------------
Automobiles (0.2%)
2,900 Ford Motor Co. 146
- --------------------------------------------------------------------------------
Auto Parts (0.2%)
3,200 Lear Corp. * 106
- --------------------------------------------------------------------------------
Banks - Major Regional (0.7%)
4,400 Mellon Financial Corp. 160
4,000 State Street Corp. 294
- --------------------------------------------------------------------------------
454
- --------------------------------------------------------------------------------
Banks - Money Center (0.4%)
2,663 Bank of America Corp. 156
1,100 J. P. Morgan & Co., Inc. 144
- --------------------------------------------------------------------------------
300
- --------------------------------------------------------------------------------
Beverages - Alcoholic (0.2%)
1,700 Anheuser-Busch Companies, Inc. 127
- --------------------------------------------------------------------------------
Beverages - Nonalcoholic (0.8%)
7,200 Coca-Cola Co. 485
2,000 PepsiCo, Inc. 69
- --------------------------------------------------------------------------------
554
- --------------------------------------------------------------------------------
Broadcasting - Radio & TV (0.3%)
3,900 CBS Corp. * 203
- --------------------------------------------------------------------------------
Chemicals (0.5%)
1,400 Dow Chemical Co. 164
3,600 Du Pont (E. I.) De Nemours & Co. 214
- --------------------------------------------------------------------------------
378
- --------------------------------------------------------------------------------
Communication Equipment (0.5%)
4,500 Lucent Technologies, Inc. 329
- --------------------------------------------------------------------------------
Computer - Hardware (1.1%)
5,500 Dell Computer Corp. * 236
1,800 Hewlett-Packard Co. 171
2,600 IBM Corp. 268
800 Sun Microsystems, Inc. * 106
- --------------------------------------------------------------------------------
781
- --------------------------------------------------------------------------------
Computer - Networking (0.8%)
6,500 Cisco Systems, Inc. * 580
- --------------------------------------------------------------------------------
Computer - Peripherals (0.1%)
1,200 EMC Corp. * 100
- --------------------------------------------------------------------------------
Computer Software & Service (2.6%)
2,800 America Online, Inc. * 203
2,100 BMC Software Inc. * 153
9,400 Microsoft Corp. * 856
8,800 Oracle Corp. * 597
- --------------------------------------------------------------------------------
1,809
- --------------------------------------------------------------------------------
Drugs (1.1%)
13,100 Pfizer, Inc. 474
6,000 Schering-Plough Corp. 307
- --------------------------------------------------------------------------------
781
- --------------------------------------------------------------------------------
Electrical Equipment (1.1%)
2,400 Emerson Electric Co. 137
4,700 General Electric Co. 611
- --------------------------------------------------------------------------------
748
- --------------------------------------------------------------------------------
Electronics - Semiconductors (1.1%)
6,300 Intel Corp. 483
2,800 Texas Instruments, Inc. 269
- --------------------------------------------------------------------------------
752
- --------------------------------------------------------------------------------
Entertainment (0.4%)
4,700 Time Warner, Inc. 290
- --------------------------------------------------------------------------------
Equipment - Semiconductors (0.1%)
500 Applied Materials, Inc. * 49
- --------------------------------------------------------------------------------
Finance - Diversified (1.6%)
1,200 American Express Co. 182
5,400 Citigroup, Inc. 291
7,500 Freddie Mac 370
2,500 Morgan Stanley Dean Witter & Co. * 301
- --------------------------------------------------------------------------------
1,144
- --------------------------------------------------------------------------------
Foods (0.1%)
3,100 Nabisco Holdings Corp. 103
- --------------------------------------------------------------------------------
Health Care - Diversified (0.9%)
4,300 Bristol-Myers Squibb Co. 314
3,100 Johnson & Johnson, Inc. 322
- --------------------------------------------------------------------------------
636
- --------------------------------------------------------------------------------
Household Products (0.7%)
5,000 Colgate-Palmolive Co. 275
1,900 Procter & Gamble Co. 205
- --------------------------------------------------------------------------------
480
- --------------------------------------------------------------------------------
Insurance - Multi-Line Companies (0.7%)
4,512 American International Group, Inc. 466
- --------------------------------------------------------------------------------
Machinery - Diversified (0.1%)
1,300 Caterpillar, Inc. 60
- --------------------------------------------------------------------------------
Manufacturing - Diversified Industries (0.5%)
4,000 Tyco International Ltd. 160
2,800 United Technologies Corp. 158
- --------------------------------------------------------------------------------
318
- --------------------------------------------------------------------------------
Medical Products & Supplies (0.7%)
5,500 Becton, Dickinson & Co. 150
3,000 Guidant Corp. * 150
4,300 Medtronic, Inc. 167
- --------------------------------------------------------------------------------
467
- --------------------------------------------------------------------------------
Oil - International Integrated (1.0%)
3,100 Exxon Corp. 246
1,400 Mobil Corp. 146
2,700 Royal Dutch Petroleum Co. 157
2,600 Texaco, Inc. 158
- --------------------------------------------------------------------------------
707
- --------------------------------------------------------------------------------
Oil & Gas - Drilling/Equipment (0.2%)
2,700 Schlumberger Ltd. 162
- --------------------------------------------------------------------------------
Oil & Gas - Exploration & Production (0.1%)
1,800 Unocal Corp. 60
- --------------------------------------------------------------------------------
Paper & Forest Products (0.1%)
1,600 International Paper Co. 83
- --------------------------------------------------------------------------------
Retail - Building Supplies (0.3%)
2,500 Home Depot, Inc. 198
- --------------------------------------------------------------------------------
Retail - Drugs (0.2%)
3,300 CVS Corp. 131
- --------------------------------------------------------------------------------
Retail - General Merchandising (1.0%)
4,700 Dayton Hudson Corp. 332
5,900 Wal-Mart Stores, Inc. 340
- --------------------------------------------------------------------------------
672
- --------------------------------------------------------------------------------
Retail - Specialty Apparel (0.1%)
2,000 Gap, Inc. 81
- --------------------------------------------------------------------------------
Telecommunications - Long Distance (1.1%)
4,000 AT&T Corp. 224
2,400 MCI WorldCom, Inc. * 198
4,700 Sprint Corp. 326
- --------------------------------------------------------------------------------
748
- --------------------------------------------------------------------------------
Telephones (0.7%)
3,600 Bell Atlantic Corp. 228
5,642 SBC Communications Corp. 293
- --------------------------------------------------------------------------------
521
- --------------------------------------------------------------------------------
Total common stocks (cost: $10,942) 15,880
- --------------------------------------------------------------------------------
Principal Market
Amount Coupon Value
(000) Security Rate Maturity (000)
- --------------------------------------------------------------------------------
BONDS (10.7%)
$ 500 Central Power & Light Co. 6.63% 7/01/2005 $ 489
500 Citicorp 6.38 1/15/2006 480
1,000 Finova Capital Corp., MTN 6.00 1/07/2004 952
500 Ford Motor Credit Co. 6.13 1/09/2006 475
175 Household Finance Corp. 6.88 3/01/2007 170
500 Hydro-Quebec 6.98 2/28/2005 497
3,000 Osprey Trust, Osprey I, Inc. (a) 8.31 1/15/2003 2,992
500 Pacific Bell 5.88 2/15/2006 473
500 Sara Lee Corp. 6.30 11/07/2005 482
500 Waste Management, Inc. 7.00 10/15/2006 428
- --------------------------------------------------------------------------------
Total bonds (cost: $7,599) 7,438
- --------------------------------------------------------------------------------
U.S. GOVERNMENT & AGENCY ISSUES (64.7%)
Government National Mortgage Assoc. (46.5%)
26,031 6.00%, 4/15/2028 - 1/15/2029 24,034
5,372 7.00%, 3/15/2026 - 6/15/2029 5,247
3,079 7.50%, 8/15/2026 - 6/15/2027 3,075
- --------------------------------------------------------------------------------
32,356
- --------------------------------------------------------------------------------
U.S. Treasury (18.2%)
15,011 U.S. Treasury Bonds 5.25 11/15/2028 12,680
- --------------------------------------------------------------------------------
Total U.S. government & agency issues (cost: $48,384) 45,036
- --------------------------------------------------------------------------------
U.S. GOVERNMENT GUARANTEED NOTE (1.4%)
Discount Note (1.4%)
970 Federal Home Loan Mortgage Corp.
(cost: $970) 5.61 12/01/1999 970
- --------------------------------------------------------------------------------
Total investments (cost: $67,895) $ 69,324
================================================================================
USAA INCOME STRATEGY FUND
NOTES TO PORTFOLIO OF INVESTMENTS
November 30, 1999
(Unaudited)
GENERAL NOTES
Market values of securities are determined by procedures and practices discussed
in note 1 to the financial statements.
The cost of securities for federal income tax purposes is approximately the same
as that reported in the financial statements.
The percentages shown represent the percentage of the investments to net assets.
Investments in foreign securities were 0.5% of net assets at November 30, 1999.
SPECIFIC NOTES
(a) These securities are exempt from registration under the Securities Act of
1933 and have been determined to be liquid by management. Any resale of these
securities may occur in an exempt transaction in the United States to a
qualified institutional buyer as defined by Rule 144A. These securities
represented 4.3% of net assets.
* Non-income producing securities.
See accompanying notes to financial statements.
USAA INCOME STRATEGY FUND
STATEMENT OF ASSETS AND LIABILITIES
(IN THOUSANDS)
November 30, 1999
(Unaudited)
ASSETS
Investments in securities, at market value (identified
cost of $67,895) $69,324
Cash 6
Receivables:
Capital shares sold 18
Dividends and interest 348
-------
Total assets 69,696
-------
LIABILITIES
Capital shares redeemed 54
USAA Investment Management Company 29
USAA Transfer Agency Company 12
Accounts payable and accrued expenses 4
-------
Total liabilities 99
-------
Net assets applicable to capital shares outstanding $69,597
=======
REPRESENTED BY:
Paid-in capital $67,645
Accumulated undistributed net investment income 507
Accumulated net realized gain on investments 16
Net unrealized appreciation of investments 1,429
-------
Net assets applicable to capital shares outstanding $69,597
=======
Capital shares outstanding, unlimited number of shares authorized,
no par value 5,816
=======
Net asset value, redemption price, and offering price per share $ 11.97
=======
See accompanying notes to financial statements.
USAA INCOME STRATEGY FUND
STATEMENT OF OPERATIONS
(IN THOUSANDS)
Six-month period ended November 30, 1999
(Unaudited)
Net investment income:
Income:
Dividends $ 93
Interest 1,708
-------
Total income 1,801
-------
Expenses:
Management fees 175
Transfer agent's fees 86
Custodian's fees 26
Postage 7
Shareholder reporting fees 2
Trustees' fees 2
Registration fees 35
Professional fees 4
Other 1
-------
Total expenses before reimbursement 338
-------
Net investment income 1,463
-------
Net realized and unrealized gain (loss) on investments:
Net realized gain on investments 184
Change in net unrealized appreciation/depreciation of investments (245)
-------
Net realized and unrealized loss (61)
-------
Increase in net assets resulting from operations $ 1,402
=======
See accompanying notes to financial statements.
USAA INCOME STRATEGY FUND
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
Six-month period ended November 30, 1999,
and year ended May 31, 1999
(Unaudited)
11/30/99 5/31/99
--------------------------
From operations:
Net investment income $ 1,463 $ 2,268
Net realized gain on investments 184 1,284
Change in net unrealized appreciation/
depreciation of investments (245) (971)
--------------------------
Increase in net assets resulting from
operations 1,402 2,581
--------------------------
Distributions to shareholders from:
Net investment income (1,460) (2,040)
--------------------------
Net realized gains (1,166) (427)
--------------------------
From capital share transactions:
Proceeds from shares sold 11,663 51,130
Shares issued for dividends reinvested 2,344 2,083
Cost of shares redeemed (13,775) (21,899)
--------------------------
Increase in net assets from
capital share transactions 232 31,314
--------------------------
Net increase (decrease) in net assets (992) 31,428
Net assets:
Beginning of period 70,589 39,161
--------------------------
End of period $ 69,597 $ 70,589
==========================
Undistributed net investment income included in
net assets:
End of period $ 508 $ 505
==========================
Change in shares outstanding:
Shares sold 977 4,175
Shares issued for dividends reinvested 197 170
Shares redeemed (1,159) (1,777)
--------------------------
Increase in shares outstanding 15 2,568
==========================
See accompanying notes to financial statements.
USAA INCOME STRATEGY FUND
NOTES TO FINANCIAL STATEMENTS
November 30, 1999
(Unaudited)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USAA INVESTMENT TRUST (the Trust), registered under the Investment Company Act
of 1940, as amended, is a diversified, open-end management investment company
organized as a Massachusetts business trust consisting of eleven separate funds.
The information presented in this semiannual report pertains only to the USAA
Income Strategy Fund (the Fund). The Fund's investment objective is to seek a
high current return, with reduced risk over time, through an asset allocation
strategy which emphasizes income and gives secondary emphasis to long-term
growth of capital.
A. Security valuation - The value of each security is determined (as of the
close of trading on the New York Stock Exchange on each business day the
Exchange is open) as set forth below:
1. Portfolio securities, except as otherwise noted, traded primarily on a
domestic securities exchange are valued at the last sales price on that
exchange. Portfolio securities traded primarily on foreign securities exchanges
are generally valued at the last quoted sale price, or the most recently
determined closing price calculated according to local market convention
available at the time the Fund is valued. If no sale is reported, the average of
the bid and asked prices is generally used.
2. Over-the-counter securities are priced at the last sales price or, if not
available, at the average of the bid and asked prices.
3. Securities purchased with maturities of 60 days or less are stated at
amortized cost which approximates market value.
4. Other debt and government securities are valued each business day by a
pricing service (the Service) approved by the Trust's Board of Trustees. The
Service uses the mean between quoted bid and asked prices or the last sale price
to price securities when, in the Service's judgement, these prices are readily
available and are representative of the securities' market values. For many
securities, such prices are not readily available. The Service generally prices
these securities based on methods which include consideration of yields or
prices of securities of comparable quality, coupon, maturity and type;
indications as to values from dealers in securities; and general market
conditions.
5. Securities that cannot be valued by the methods set forth above, and all
other assets, are valued in good faith at fair value, using methods determined
by USAA Investment Management Company (the Manager) under the general
supervision of the Board of Trustees.
B. Federal taxes - The Fund's policy is to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its income to its shareholders. Therefore, no
federal income or excise tax provision is required.
C. Investments in securities - Security transactions are accounted for on the
date the securities are purchased or sold (trade date). Gain or loss from sales
of investment securities is computed on the identified cost basis. Dividend
income is recorded on the ex-dividend date; interest income is recorded on the
accrual basis. Discounts and premiums on securities are amortized over the life
of the respective securities.
D. Use of estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that may affect the reported amounts in the
financial statements.
(2) LINES OF CREDIT
The Fund participates with other USAA funds in three joint short-term revolving
loan agreements totaling $850 million, two with USAA Capital Corporation
(CAPCO), an affiliate of the Manager ($250 million committed and $500 million
uncommitted), and one with Bank of America ($100 million committed). The purpose
of the agreements is to meet temporary or emergency cash needs, including
redemption requests that might otherwise require the untimely disposition of
securities. Subject to availability under both agreements with CAPCO, the Fund
may borrow from CAPCO an amount up to 5% of the Fund's total assets at CAPCO's
borrowing rate with no markup. Subject to availability under its agreement with
Bank of America, the Fund may borrow from Bank of America, at Bank of America's
borrowing rate plus a markup, an amount which, when added to outstanding
borrowings under the CAPCO agreements, does not exceed 25% of the Fund's total
assets. The Fund had no borrowings under either of these agreements during the
six-month period ended November 30, 1999.
(3) DISTRIBUTIONS
Distributions of net investment income are made quarterly. Distributions of
realized gains from security transactions not offset by capital losses are made
in the succeeding fiscal year or as otherwise required to avoid the payment of
federal taxes.
(4) INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales/maturities of securities, excluding
short-term securities, for the period ended November 30, 1999, were $14.9
million and $16.7 million, respectively.
Gross unrealized appreciation and depreciation of investments at November 30,
1999, were $5.0 million and $3.6 million, respectively.
(5) TRANSACTIONS WITH MANAGER
A. Management fees - USAA Investment Management Company carries out the Fund's
investment policies and manages the Fund's portfolio. The Fund's management fees
are computed at .50% of its annual average net assets.
B. Transfer agent's fees - USAA Transfer Agency Company, d/b/a USAA Shareholder
Account Services, an affiliate of the Manager, provides transfer agent services
to the Fund based on an annual charge of $28.50 per shareholder account plus
out-of-pocket expenses.
C. Underwriting services - The Manager provides exclusive underwriting and
distribution of the Fund's shares on a continuing best efforts basis. The
Manager receives no commissions or fees for this service.
D. Brokerage services - USAA Brokerage Services, a discount brokerage service
of the Manager, may execute portfolio transactions for the Fund. The amount of
brokerage commissions paid to USAA Brokerage Services during the six-month
period ended November 30, 1999, was $3,143.
(6) TRANSACTIONS WITH AFFILIATES
USAA Investment Management Company is indirectly wholly owned by United Services
Automobile Association (the Association), a large, diversified financial
services institution. At November 30, 1999, the Association and its affiliates
owned 303.0 thousand shares (5.2%) of the Fund.
Certain trustees and officers of the Fund are also directors, officers, and/or
employees of the Manager. None of the affiliated trustees or Fund officers
received any compensation from the Fund.
(7) YEAR 2000
Like other mutual funds, the Fund could be adversely affected if the computer
systems used by the Manager and the Fund's other service providers are not able
to perform their intended functions effectively after 1999 because of the
inability of computer software to distinguish the year 2000 from the year 1900.
The Manager has taken steps to address this potential year 2000 problem with
respect to the computer systems that they use and to obtain satisfactory
assurances that the comparable steps are being taken by the Fund's other major
service providers. At this time, however, there can be no assurance that these
steps will be sufficient to avoid any adverse impact to the Fund from this
problem.
8) FINANCIAL HIGHLIGHTS
Per share operating performance for a share outstanding throughout each period
is as follows:
<TABLE>
<CAPTION>
Six-month Nine-month
Period Ended Period Ended
November 30, Year Ended May 31, May 31,
--------------------------------------------------------
1999 1999 1998 1997 1996*
--------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 12.17 $ 12.11 $ 10.84 $ 10.06 $ 10.00
Net investment income .25 .44 .32 .49 .39(b)
Net realized and
unrealized gain (loss) - .16 1.46 .84 (.06)
Distributions from net
investment income (.25) (.44) (.46) (.50) (.22)
Distributions of realized
capital gains (.20) (.10) (.05) (.05) (.05)
--------------------------------------------------------
Net asset value at
end of period $ 11.97 $ 12.17 $ 12.11 $ 10.84 $ 10.06
========================================================
Total return (%) ** 2.10 4.97 16.72 13.59 3.23
Net assets at end
of period (000) $69,598 $70,590 $64,446 $13,878 $12,173
Ratio of expenses to
average net assets (%) .97(a) .97 1.00 1.00 1.00(a)
Ratio of expenses to average
net assets, excluding
reimbursements (%) N/A N/A 1.21 1.51 1.78(a)
Ratio of net investment
income to average net
assets (%) 4.19(a) 3.83 4.35 4.80 4.71(a)
Portfolio turnover (%) 21.50 117.12 7.15 64.71 78.60
</TABLE>
* Fund commenced operations September 1, 1995.
** Assumes reinvestment of all dividend income and capital gains distributions
during the period.
(a) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
(b) Calculated using weighted average shares.
Trustees
Robert G. Davis, Chairman of the Board
Michael J.C. Roth, President and Vice Chairman of the Board
John W. Saunders, Jr., Vice President
Barbara B. Dreeben
Howard L. Freeman, Jr.
Robert L. Mason
Richard A. Zucker
Investment Adviser, Underwriter, and Distributor
USAA Investment Management Company
9800 Fredericksburg Road
San Antonio, Texas 78288
Transfer Agent
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, Texas 78288
Legal Counsel
Goodwin Procter & Hoar LLP
Exchange Place
Boston, Massachusetts 02109
Custodian
State Street Bank and Trust Company
P.O. Box 1713
Boston, Massachusetts 02105
Independent Auditors
KPMG LLP
112 East Pecan, Suite 2400
San Antonio, Texas 78205
Telephone Assistance Hours
Call toll free - Central Time
Monday - Friday 7:00 a.m. to 9:00 p.m.
Saturdays 8:30 a.m. to 5:00 p.m.
Sundays 11:30 a.m. to 8:00 p.m.
Internet Access
usaa.com(Service Mark)
For Additional Information on Mutual Funds
1-800-531-8181, (in San Antonio) 456-7211
For account servicing, exchanges, or redemptions
1-800-531-8448, (in San Antonio) 456-7202
Recorded Mutual Fund Price Quotes
24-hour service (from any phone)
1-800-531-8066, (in San Antonio) 498-8066
Mutual Fund USAA TouchLine (Registered Trademark)
(from touch-tone phones only)
For account balance, last transaction, fund prices,
or to exchange or redeem fund shares
1-800-531-8777, (in San Antonio) 498-8777
